Texas crypto firm Lejilex and CFAT take on SEC: A battle for digital asset classification

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In Texas, a crypto company named Lejilex and a group called the Crypto Freedom Alliance of Texas (CFAT) are taking on a big challenge.

They’re suing the Securities and Exchange Commission (SEC) because the SEC is treating digital money, like Bitcoin and other cryptocurrencies, as if they’re the same as stocks or bonds.

The lawsuit started in Fort Worth, Texas, on February 21, 2024, and it’s a big deal because it could change how digital money is handled in the future.

Lejilex and CFAT believe that the SEC is overstepping its boundaries. They say that not all digital money should be seen as securities (which are like stocks or bonds). Lejilex and CFAT are worried because this could make it harder for people to buy and sell cryptocurrencies freely.

Why This Matters?

The big question here is about what counts as an “investment contract” when it comes to digital money.

According to U.S. law, for something to be considered an investment contract, there needs to be an investment of money with the expectation of making more money, thanks to the efforts of others.

The trouble began when the SEC started to clamp down on other big digital money platforms like Coinbase and Binance.

Over the last year, under the leadership of Chairman Gary Gensler, the SEC has significantly increased its regulatory actions against the cryptocurrency industry, leading to a never-before-seen level of oversight. This attention from the SEC has caused unease across the cryptocurrency community.

You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great. While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement

This crackdown made life difficult for newcomers like Lejilex because they wanted to offer a variety of digital coins that the SEC considers to be securities, wrapping them up in a lot of complicated rules.

Lejilex and CFAT argue that this doesn’t really apply to a lot of cryptocurrencies because when you buy them, you’re not always expecting someone else to work to make you money.

Taking a Stand in Court

By going to court, Lejilex and CFAT are trying to get some clarity. They’re using a legal argument called the “major questions” doctrine. This basically means they’re asking the court to say that the SEC can’t make big decisions about digital money without clear permission from Congress.

This lawsuit is important because it could change the way digital money is regulated in the U.S. The choice to fight this battle in Fort Worth is strategic because the courts there are known for supporting personal freedoms and might be more sympathetic to Lejilex and CFAT’s cause.

What’s Next for Crypto?

Everyone in the crypto world is watching this case closely. It’s not just about Lejilex and CFAT; it’s about setting the rules for how cryptocurrencies are treated. This could affect how much people invest in digital money and how new technologies develop.

In simple terms, Lejilex and CFAT are fighting for a future where cryptocurrencies can be traded more freely without being bogged down by rules that don’t really fit. This lawsuit could help decide whether cryptocurrencies are treated more like traditional money or something entirely new.

A win for Lejilex and CFAT could encourage more startups to innovate without fear of unexpected regulatory challenges. Conversely, a victory for the SEC might lead to a more cautious approach among entrepreneurs, potentially slowing down the pace of innovation in the crypto space.

This case represents a critical moment in the ongoing dialogue between regulators and the crypto industry, highlighting the need for clear, fair, and forward-thinking policies that support both consumer protection and technological advancement.